PR Ltd. totally understands the importance of employee motivation and retention, thus, it has implemented a structured wage policy. The basic wage…
CA Intermediate · Cost and Management Accounting · MTP · May 2025
PR Ltd. totally understands the importance of employee motivation and retention, thus, it has implemented a structured wage policy. The basic wage rate is set at 100 per hour along with Dearness Allowance (DA) of 50%, which is competitive within the industry. To encourage productivity and compensate for the demands of overtime, the company offers enhanced rates for hours worked beyond the standard schedule. The normal working days are from Monday to Saturday, and the worker would be paid overtime premium of- 75% of basic wage rate (inclusive of DA) for working before and after normal working hours, and 125% of basic wage rate (inclusive of DA) for working on Sundays. Throughout the previous year, the following hours were worked- Normal time 4,00,000 hours Overtime before and after normal working hours 80,000 hours Overtime on Sundays 20,000 hours Total 5,00,000 hours However, the hours recorded for job 'PR123' are as follows: Normal time 4,000 hours Overtime before and after normal working hours 400 hours Overtime on Sundays 100 hours Total 4,500 hours You are required to CALCULATE the employee cost chargeable to job ‘PR123' and the treatment of overtime premium: (i) where overtime is worked regularly throughout the year as a policy due to the workers' shortage. (ii) where overtime is worked irregularly to meet the requirements of production.
Suggested Answer and Working Notes:
Workings Basic wage rate = ₹ (100 +50 for DA) per hour = 150 per hour Overtime wage rate before and after working hours = 150 + 75% of 150 = 262.50 per hour Overtime wage rate for Sundays = 150 + 125% of 150 = 337.50 per hour Computation of average inflated wage rate (including overtime premium) Particulars (₹) Annual wages for the previous year for normal time (4,00,000 hrs. × ₹ 150) 6,00,00,000 Wages for overtime before and after working hours (80,000 hrs. × ₹ 262.50) 2,10,00,000 Wages for overtime on Sundays (20,000 hrs. × ₹ 337.50) 67,50,000 Total wages for 5,00,000 hrs. 8,77,50,000 Average inflated wage rate = 8,77,50,000 / 5,00,000 hrs. = 175.50 (i) Where overtime is worked regularly as a policy due to workers' shortage: The overtime premium is treated as a part of employee cost and job is charged at an inflated wage rate. Hence, employee cost chargeable to job 'PR123' = Total hours × Inflated wage rate = 4,500 hrs. × ₹ 175.50 = 7,89,750 (ii) Where overtime is worked irregularly to meet the requirements of production: Basic wage rate is charged to the job and overtime premium is charged to factory overheads as under: Employee cost chargeable to Job ‘PR123’ = 4,500 hours @150 per hour = 6,75,000 Factory overhead = {400 hrs. × ₹ (75% of 150)} + {100 hrs. × (125% of 150)} = {45,000 +18,750} = 63,750
Topics: Employee Cost & Direct Expenses
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